Dividend Tax changes set to hit small business owners and investors

Changes to the Dividend Tax regime, which will see the existing tax-free allowance fall from £5,000 to £2,000 from April next year, are set to hit small business owners and investors.

The changes currently being considered by MPs as part of the Finance Bill 2017-19 had been delayed when what is now the Finance Act 2017 was dramatically cut down in order to secure its passage through Parliament ahead of June’s snap General Election.

The Government estimates that the change will generate an additional £930 million annually for the Treasury coffers, but at an additional cost to shareholders of £225, £975 or £1,143 annually for basic, higher and additional rate taxpayers respectively.

The changes will not affect the rate of Dividend Tax, with rates of 7.5 per cent for those who pay Income Tax at the basic rate, 32.5 per cent for those paying at the higher rate and 38.1 per cent for those paying at the additional rate.

Depending on their specific circumstances, there are a number of strategies that those affected by the reduced allowance will be able to employ to minimise the impact of the change. For investors, this includes the use of ISAs, while small business owners may be able to bring forward dividend payments to take place before the allowance is cut.